Third U.S. Circuit Court of Appeals Rejects J&J’s “Texas Two-Step” Strategy

On January 30, 2023, the Third Circuit Court of Appeals rejected Johnson & Johnson’s (“J&J”) use of the “Texas Two-Step” bankruptcy strategy. The unanimous decision is a sharp rebuke of the emerging litigation trend in which companies facing significant mass tort litigation, like J&J, invoke Texas law to create a virtually non-operational subsidiary responsible for the mass tort liabilities and then subsequently bankrupt that subsidiary.

J&J’s plan to utilize Limited Talc Liabilities, Management (“LTL”) to minimize its own liability was originally approved by the bankruptcy court, reasoning that such a resolution is more efficient and fairer to the health-goods giant. However, with its decision, the Court of Appeals ruled that the healthy and solvent J&J cannot use corporate machinations to evade what it owes. Writing for the Court, Judge Thomas Ambro made clear that in the absence of financial distress, there is no reason to afford the protections of bankruptcy to the company. In the case at bar, both J&J and LTL can pay their liabilities and are not financially distressed. Absent J&J’s own desire, there is no reason to afford it, or its subsidiaries, the protection of bankruptcy, given their clear solvency. J&J is now challenging the decision from the three judge panel and seeking en banc rehearing before all the judges in the Third Circuit.

J&J has long maintained that its talc-based baby powder products are safe for use and free of carcinogens. However, since 1971, at the latest, there has been evidence to the contrary that suggests a link between talcum powder and various cancers. In 1998 J&J issued a memo outlining a strategy to “stop the rumor” of a link between talcum powder and ovarian cancer. However, J&J’s attempts were in vain, as the company has been involved in widespread litigation alleging those products caused cancer, including mesothelioma and ovarian cancer, since 2009, and many of these cases remain ongoing.

Shelby Roden filed one of the first federal talcum powder lawsuits in the State of Alabama and will continue to monitor the ongoing litigation alleging claims related to ovarian and other cancers. If you or a family member have been diagnosed with ovarian or other cancer, please contact our office at 205-933-8383 for a free consultation.